Sixty-Eight Companies Avoided State Income Tax, Study Finds

Dec. 7 (Bloomberg) -- Sixty-eight large U.S. corporations
paid no state income tax in at least one of the past three years
and 20 had an average tax rate of zero or less in that period,
according to a report by the Institute on Taxation and Economic
Policy.

The Washington-based research group, which is backed by
labor unions, found that three companies -- Washington-based
Pepco Holdings Inc., American Electric Power Co. of Columbus,
Ohio, and DuPont Co. of Wilmington, Delaware -- paid no state
income tax in 2008, 2009 and 2010.

The study examined 265 companies in the Fortune 500 that
were profitable in all three years and reported enough
information to evaluate state income tax payments.

It found that those companies paid state income taxes equal
to 3 percent of their U.S. profits, about half of the average
statutory state tax rate, according to Matthew Gardner,
executive director of the institute and co-author of the report.

The reduced rate of corporate state income tax payments
translates into $42.7 billion in forgone revenue to those states
in the past three years, the report found.

“Our report should be understood to show that state income
taxes are not raising the revenue they were designed for,”
Gardner said.

Forty-four states and the District of Columbia levy some
form of state corporate income tax. Ohio, Nevada, South Dakota,
Texas, Wyoming and Washington don’t have the tax, Gardner said.

Falling Revenue

Gardner said state corporate income tax revenue has been
falling for 20 years. He attributed the decline to increased
state subsidies to companies and to federal tax breaks that
reduce the amount of taxable revenue. Companies also devote
“money and legal firepower to coming up with tax-avoidance
schemes,” he said.

States have contributed to the decline by shifting
corporate taxation from property and payroll to sales, which
generally yields lower taxes, said Joe Huddleston, executive
director of the Washington-based Multistate Tax Commission. The
organization of state governments administers tax laws for
multistate businesses.

Large companies have done more to shift income to low-tax
or no-tax states, Huddleston said.

“It’s only the biggest of the big that are able to avoid
equitable tax treatment,” Huddleston said.

The three companies that, according to the report, avoided
state income taxes were among 30 corporations listed as paying
no federal income tax in the same period in a study last month
by Citizens for Tax Justice, the institute’s sister
organization.

Pat Hemlepp, a spokesman for American Electric Power, said
the findings in both reports are skewed because the period of
the study occurred during an economic decline, when the company
participated in federal stimulus programs to create jobs. Those
programs benefited the company’s state and federal tax position,
he said.

‘Villainizing Companies’

“There was bonus depreciation and other programs that
allowed for deferral of taxes,” Hemlepp said in a telephone
interview. “All a report like this is doing is villainizing
companies for following the directives of Congress and the
administration.”

The advocacy group’s report said that from 2008 through
2010, AEP had profits of $5.9 billion, a negative state tax
position of $97 million and negative federal tax of $545
million.

A company with a negative tax position effectively receives
a tax benefit from the government, such as credits or refunds.

Hemlepp said from 2005 through 2007, the three years before
the period covered by the study, AEP paid $1.3 billion in
federal taxes and $87 million in state taxes. The company’s tax
payments will begin to show similar levels when the effects of
stimulus programs wind down in 2012, Hemlepp said.

Stimulus Programs

Pepco cited the effects of stimulus programs in a statement
on its tax payments.

The power company made about $2 billion in capital
investments subject to tax benefits, including bonus
depreciation and other deductions, chief financial officer
Anthony Kamerick said in a statement.

The accelerated deductions, along with “significant cash
contributions the company made to the employee pension
retirement plan,” were the main reasons Pepco didn’t face a tax
liability in the 2008-2010 period, the statement said.

DuPont spokeswoman Tara Stewart declined to address the
conclusions of either report.

“DuPont complies with all tax laws and regulations in
every jurisdiction in which it operates,” she said in an e-mail.